The U.S. housing market saw a decline in demand last year due to several factors, including higher mortgage rates, inflation, job cuts, and economic uncertainty. As a result, home prices started to decrease in June of 2022, however, they still remained higher compared to the same time the previous year. According to data from CoreLogic, in December 2022, home prices were 6.9% higher YoY, marking the lowest rate of annual appreciation since Summer 2020. At the peak of the market, in April 2022, annual price appreciation reached a high of 20%.
With mortgage rates starting to decline in December 2022, home prices also began to react immediately. The rate of decline slowed compared to the summer, with prices only decreasing by 3% cumulative since last spring’s peak, according to Selma Hepp, Chief Economist at CoreLogic. While exurban areas, which became popular during the pandemic, are currently experiencing larger corrections in prices, Hepp doesn’t expect this trend to persist for long. She believes that while price deceleration will continue into the spring of 2023, with the market possibly experiencing YoY declines, the recent decrease in mortgage rates has stimulated buyer demand and could result in a more optimistic home buying season.
Data from Fannie Mae‘s monthly survey of home buying sentiment shows an increase in sentiment for the third straight month in January 2023. Consumers surveyed still expect prices to either fall or remain flat in the coming year. However, the share of those who believe it’s a good time to sell a home increased to 59% from 51%.
Real estate agents are reporting an early surge in the spring market, with open houses seeing more foot traffic and the return of bidding wars. Homebuilders are also reporting increased demand, with homebuilder sentiment rising for the first time in 12 months. The National Association of Home Builders attributes this increase in demand to lower mortgage rates. The NAHB’s home affordability index started the year at its lowest level, but lower rates are starting to improve this.
According to a report from Black Knight, if home prices continue to decline at the average rate of the past six months, annual home price growth could go negative within the next three months. It now takes nearly $600 more to make the monthly mortgage payment on the average priced home compared to the same time last year.
Mortgage applications to purchase a home have risen throughout January and the first week of February 2023, although they are still lower compared to the same period last year. Lower rates and somewhat lower home prices have contributed to the recent increase in purchase lending. However, affordability remains a major constraint for much of the market.
Impact of Falling Mortgage Rates on the Housing Market Throughout History
Falling mortgage rates have had a significant impact on the housing market throughout history. When mortgage rates decline, it becomes more affordable for individuals and families to buy homes, as the monthly payments for their loans decrease. This increased affordability can drive demand for housing, leading to a rise in home prices and an increase in the number of homes being purchased.
For example, in the late 1990s and early 2000s, the Federal Reserve lowered interest rates to stimulate the economy. This caused mortgage rates to fall, and as a result, the housing market saw a significant increase in demand, with home prices and sales rising dramatically. However, this surge in demand also led to a housing bubble, with many buyers taking on risky mortgages and prices becoming unsustainable. This eventually resulted in the burst of the housing bubble and a market crash, contributing to the 2008 financial crisis.
Another example can be seen in the aftermath of the 2008 financial crisis, when the Federal Reserve again lowered interest rates to stimulate the economy. This caused mortgage rates to fall to historic lows, and once again, the housing market saw a significant increase in demand, with home prices and sales rising. This increase in demand was fueled by both low mortgage rates and a growing economy. In addition, the government’s efforts to promote homeownership, such as tax incentives and increased access to credit, also contributed to the rise in demand.
However, despite these positive effects, there are also potential risks associated with declining mortgage rates. As demand for housing rises and prices increase, there is a risk that home prices may become overvalued, leading to a housing bubble. Moreover, as more people take out mortgages, the risk of default and foreclosure also increases.
Declining mortgage rates necessarily have the potential to have a positive impact on the housing market by making homeownership more affordable and driving demand for housing. However, it is important to monitor the market closely and to take steps to mitigate potential risks. With a strong economy and continued job growth, the housing market is poised for a strong 2023, despite some challenges such as affordability constraints and economic uncertainty. Homebuyers and sellers needs to keep their eyes and ears open for the latest market trends and seek advice from real estate professionals to make the best decisions for their specific circumstances.